Most of the media coverage on the real estate bust has focused on middle and lower class families hard hit by tight credit and falling home prices""the median home price in the United States is now just $174,000. But owners of high-priced houses are now also feeling the financial pinch. In fact, relatively speaking, the outlook for higher priced homes is worse than it is for the overall market. And while few people have much sympathy for people who own half-million dollar homes, the reality is that their distress will make it harder for the housing industry to recover.
According to Inside Mortgage Finance, jumbo loans currently account for just eight percent of all American home loans, but are expected to increase to as high as 12 percent of loans when the conforming loan limit is lowered October 1.
For example, while sales of homes below $250,000 rose nearly 25 percent in July 2011 compared to July 2010, sales of homes over $500,000 were basically flat. Demand for the lower priced houses has been driven mainly by investors buying distressed properties in order to refurbish them and quickly resell""or flip""the house, or rent it out while waiting for the market to recover. However, higher-priced houses have had far weaker investor interest. These higher priced homes are also more likely to be vulnerable to a volatile stock market because potential buyers for expensive homes typically have portfolios and are adversely affected by the stock market"s fluctuations.
This is important because homes priced $500,000 and higher are considered move-up homes for people with growing families or who are succeeding in their careers. Many economists believe that without a move-up market the housing market will continue to suffer. When most of the transactions taking place are in a distressed market, it artificially decreases the national home prices. Not having a thriving move-up market also means consumers who own higher priced homes can"t sell if they need to, which can push up delinquencies on jumbo and even higher-priced conforming loans.
And these are not millionaires who have these higher priced homes; it"s mostly baby boomers that now need to get out of big, expensive suburban family homes they can no longer afford. Many of these boomers are looking to sell, so that they can settle into smaller, more affordable homes, such as those offered by
LGI Homes. The lack of move-up buyers, however, is trapping them in their homes, and retarding potential recovery in the new homes market. The bottom line is, for the housing market to fully recover, both the low and high end need to recover.
